Lilya Tessler Interview - Chamber of Digital Commerce's Amicus Brief in the SEC Ripple XRP Lawsuit

Lilya Tessler is a Partner and head of the FinTech and Blockchain Group at Sidley Austin LLP. Lilya filed the Amicus Brief in the SEC Ripple XRP lawsuit on behalf of the Chamber of Digital Commerce. We discuss the brief, its goal, crypto regulations, what is next in the lawsuit and much more.

Transcript

Welcome back to the Thinking Crypto podcast, your home for cryptocurrency news and interviews. With me today is Lilya Tessler, who’s the partner and head of the FinTech and Blockchain group at Sidley Austin, LLP. Lily, it’s great to have you on.

• Great, thanks Tony for having me here today.
• Well, Lily, I am excited to speak with you recently on behalf of the Chamber of Digital Commerce. You filed an amicus brief with regards to the SEC Ripple lawsuit, but I would love to start with your background, get to know you a bit better, where you’re from, how’d you become a lawyer, things like that.
• Yeah, great, happy to get started. So in terms of my background, I grew up in New Jersey. I’ve lived in Jersey most of my life and during the pandemic migrated like many other FinTechs, the Austin Texas area and kind of in the center of some of the tech hub here in Austin but like many of my clients, I say that I’m decentralized because I see and travel on a regular basis across different Sydney offices. I currently split my time between Sidley’s Dallas office and our newly opened Miami office, another big FinTech and Blockchain hub that’s developing. And I’ve spent a lot of time, just came back from a trip from Miami last week as well. So I’m everywhere in supporting our clients in this area.
• So it sounds like your firm supports a lot of blockchain and crypto companies.
• Yeah, we support a pretty wide range of blockchain clients. I started working clients pretty early on merging technology companies in this area. Coinbase actually was one of my first clients back in 2016. So very early on I started supporting many other layer one protocols and other blockchain technology companies and intermediaries, crypto exchanges, broker dealers supporting some of the early investments in blockchain digital assets, especially those that are securities and seeking registration with SEC and FINRA. And now at Sidley we support also the bigger financial institutions and enterprises looking to enter this space partner with some of the existing technology companies or create their own infrastructure to support blockchain and digital assets.
• So I have to say you guys are probably very busy because there’s a lot of companies entering the market and building, I’m sure business is not slow at this point.
• No, it’s definitely exciting time to be in crypto and blockchain. It’s exciting to see and help clients grow and build from smaller enterprises working directly early on in CEOs and CTOs in this area and now with bigger enterprises. This is I think my third crypto winter and it has not slowed down at all in terms of the amount of work and the types of clients we support. I will say in recent months with the downturn, we have seen more work on the insolvency restructuring bankruptcy, more ICC enforcement inquiries that we’re seeing clients get. And so that we’re able to kind of support from the litigation enforcement perspective, some of those clients. But also we’re seeing more transactions than certain clients trying to get into investments at a lower evaluation, trying to take advantage of M&A opportunities as certain companies unfortunately are struggling to get by in the current marketing conditions.
• Mm. So from a experience standpoint as it relates to crypto, you’ve been here since 2016, so you’ve got a good amount, like you said, three crypto winters. But I’m curious, what was your first encounter with crypto and what was your aha moment?
• So I was a traditional FinTech lawyer representing clients in the securities markets that were building innovative FinTechs and FinTech products. And Coinbase was one of our first clients in 2016, as I mentioned earlier. And they engaged us to apply the securities loss to digital assets. And that was the first time it looked at Howey, and how do you apply Howey in the context of digital assets and whether certain offerings or securities offerings as applied in that framework. Wrote a legal analysis and memo back in late 2016 on the topic. I was part of a team confirmed that was writing this analysis which Coinbase attached an open source to the entire community through Coinbase Securities Law framework which was published in December, 2016 before the SEC had put out much or any guidance on the application of Howey test. There were some crypto cases the SEC had published, but the first pivotal guidance was the Dow report in July, 2017. So this predated that by six months. And I started the discussion on how do you think about Howey the context of digital assets.
• Mm. So I have to ask, I ask all my guests, do you own any crypto and if so, which ones?
• So I would say diversify my career for my financial holdings, but I do own a small amount of some of the basics, Bitcoin, Ethereum and also now I have my wallet, my daughter’s NFT collection that she’s created on her own.
• Very cool. So let’s talk about the amicus brief. Why was this file and what is the goal?
• So the amicus brief, I file on behalf of the chamber really to speak on behalf of the industry and the chamber’s members on being a friend of the court and ensuring the court is aware of what legal precedent exists and what legal precedent doesn’t exist as applied to blockchain and digital assets generally and offerings in this area. The chamber’s interest here is to ensure the proper law is considered by the court, and the court is aware of the impact their decision on especially on the legal side will have on the industry as a whole. So the chamber, this was a follow on to a brief that I had filed in the SEC versus Telegram case on behalf of the chamber. And really the premise behind is making the court aware of what the Howey test is, the Howey test, and what an investment contract is, I think many in the market already know. But the Howey test is really about the investment contract and it’s separate and distinct from the subject of that investment contract. Assets are offered pursuant to investment contracts and need to comply with the securities laws. But what the subject that investment contract is not itself a security. What that asset represents, the law is currently still unclear on what the subject to investment contract itself represents, but also the brief sites to examples of other investment contracts that had commodities that were subject to investment contract. There were cases about beavers, oranges or well known. Oranges can be eaten, beavers can be used for their pelts. Condos can be lived in. So assets could be sold, some are commodities. There could be assets that are not commodities sold pursuant to investment contracts, but the court needs to distinguish and properly think about what the sub investment contract is when considering what law applies to an investment contract in the case. It also the brief goes further in that it talks about the fact that there is no law on a digital asset that was previously sold pursuant to investment contract and later sold in another transaction. Whether that’s a technology transaction, commercial transaction or another securities transaction. There’s no legal precedent asked in secondary trading. And the court may not even go, the decision may not even go to whether or not it needs to think about secondary trading. But it was important for the chambers members to highlight that the fact that there is no legal precedent on that secondary training component. And also highlights a number of regulatory and legislative initiatives that go to that question that the court could draw from sixth extent it does need to set up precedent on secondary training.
• Yeah, and I’m glad that you guys are there to your point, educate, inform and make sure all perspectives and aspects of the law are are viewed and taking into consideration because, yeah, without getting too much in mind to my personal feelings, I feel there’s certainly a big gap in, we’re missing the updated Howey test, I would say, and maybe that’s for Congress to act and get an updated version for digital assets and cryptocurrencies.
• Yeah. And the Howey test really was a case about primary offerings and that’s what the brief discusses. It could be considered a secondary context, but really hasn’t, especially in the context of digital assets been applied in that context. And I think the SEC is really thoughtful in thinking about this issue. We’ve seen recent public speeches from the chair’s office and various divisions saying, we’re thinking about what proactive disclosure needs to be put out for registration, alternative disclosures for crypto assets. That there may need to be a registration regime for secondary transactions in this area. So they are thinking about what needs to be put out there and it’s positive to hear the SEC saying, we’re gonna put out a disclosure regime similar to asset act securities where there’s an alternative disclosure regime because the information an investor in asset that securities needs to have is different than that. If you’re investing in a company and you’re buying equity. Similarly, someone investing in an asset in a underlying crypto asset may need to have access to different network related information in order to make an informed decision.
• Mm. Now, I think was last week, yes, the brief was approved. What are the next steps given the approval?
• So the brief was approved, so when we filed, we filed a motion for leave of the court to allow us to file when it was approved on September 21st. We filed with the court the same brief that we filed previously as an exhibit with the judge. So, currently the judge is reviewing that brief along with motions for summary judgment that are filed by both parties and it’s effectively an opportunity for the judge to consider, but also for each of the parties to consider how they wanna respond in their opposition briefs to be filed next month in order to react to some of the legal issues raised in the brief.
• Now some folks are asking, how come the digital chamber waited so long to file this brief because this case has been going on for over a year.
• So, the digital chamber, and I tried to file more than a year ago in terms of having me be admitted to act as counsel to digital chamber as Amicus curiae in the case. At that time the judge rejected that request and said it wasn’t timely. And the reason it wasn’t timely is typically motions for summary judgment are filed first and amicus briefs are filed after, ’cause it really is about the legal issues in those motions for summary judgment that the amicus curiae is appointing on. And that’s a time when the judge is considering the legal issues, not the procedural issues. And over the last year, really what the judge was thinking about and making decisions on our discovery motions, not the legal issues that are critical to the case. So when the parties filed on September 13th, the motions for summary judgment even under seal, we immediately thereafter already and the next day filed this amicus brief in a timely manner really the earliest that we could file the next day, the brief. And we also did so at a time where we didn’t even see the more typically parties would or them at the security wanna see the motions for summary judgment, they were filed under seal. So we didn’t even see those motions redacted until the following week after we filed amicus brief.
• Hmm. I appreciate that clarity ’cause I think folks are wondering what’s going on, but to your point, the judge said, now it’s not the right time when you guys tried to do it at the beginning. Okay. That absolutely makes-
• And just to also distinguish, and maybe I think a lot of the questions around this was in SEC versus Telegram, we filed much sooner in the process. But that was also a different case. There the timeline for filing was much faster and expedited because the SEC filed a temporary restraining order and then we’re seeking a permanent injunction and that expedites the discovery period, it expedites the motion period. So in that case, I had to write a lot faster to be able to get the brief submitted than the time that we were able to take here and make sure we got it right.
• Yeah, yeah. So it certainly makes sense. Now, there’s another friend of the court, attorney John Deaton, and he’s representing about 70,000 pluses, excuse me, XRP holders. what are your thoughts on what John is doing and also just in general in the world that we live in with social media, you have individual token holders who are upset at the SEC and it’s a different dynamic than I think we’ve seen historically.
• Yeah, so I think anyone, the process for amicus curiae is to be a friend of the court and weigh in on behalf of different interested parties in the case that what have a view may be different than what the parties are writing about in their motions. And, I think John Deatons, as I understand his interests and what he’s weighing in on is the interest that XRP holders, what the chamber and in terms of our brief was weighing in is on behalf of the blockchain industry and the chambers members generally. They may include blockchain technology companies issuers. But it also includes market participants, intermediaries in this space, investors in this space, and bringing a broader perspective to what the court should be thinking about and setting legal precedent. So there’s definitely room for other amicus briefs in this space that set forth the interests of other parties.
• Mm. I don’t know if you can take us beyond the curtain a bit, but, how are you guys thinking about how the token holders are affected and their ability to voice their concerns or displeasure or approval of certain things, how these cases going are going on social media and content and so forth? Once again, I think it’s just a different dynamic and a different world that we’re entering in. And so I can’t imagine like the judge and the folks there who are looking at this also thinking about, hey, there’s people who are following this to the T. And they’re all on social media and everything is amplified. I don’t know if you have a perspective on that and how things are changing there.
• Yeah, so I think it’s a lot of change now the digital age of everything being on social media. And I think a lot of people in the market have access to the court filings in a real time basis faster than they ever have ever seen it before and are analyzing it. I think the judge appropriately probably is not really looking at the social media and all the commentary views. The judge is focused and should be focused on the filings before it and what the parties, and that’s why it’s important to have amicus brief submitted is to ensure that the judge is looking at the critical information that it needs to make it’s informed decision as opposed to looking at some of the strenuous information on social media. But just generally, I think in every case, especially in every well publicized case, not outside of this industry too, there’s always a lot of social media and noise and views that market participants have, but I don’t think it really impacts or shouldn’t impact the way that the courts are making a decision in something like this.
• Hmm. So given the summary judgements have been put forth by both parties in the lawsuit and you guys are filing your amicus brief and so forth, what’s next here? I’m not necessarily looking for predictions, but what would be the next step as far as just the process?
• So the opposition motions we’ll see filed on October 18th and replies are due November 15th. After that, I think the judge probably late this year, nearly next year will make a decision assuming the facts aren’t at in dispute on the legal issues at play. Based on that, we’ll see what happens. I think most likely both one or the other party, depending on the decision could appeal. And so we could see these issues playing out in the appeals court. Another alternative view is there could be, and as we’re seeing more guidance from the SEC and them being public that they may be putting out more guidance on disclosures and also various legislative bills that are pending. It could be that this case and the issues may be move depending on what comes out. And as you see in the near term, that also could change a trajectory of the case. So it’s hard to predict, but it’ll ultimately be either some type of precedent setting issue in the case or guidance that may change and shift, what’s happening in the case. In either instance, I think it’s gonna be important in looking at what decision the court makes. I think a lot of people in the community are looking at the XRP and how that the facts are gonna be determined. But what I’m really looking at, I think what the industry should be focused on, is how the law is gonna be applied in the decision of the judge. That was really important, the telegram case, the judge read the chambers amicus brief and really made a decision on the investment contract and were was careful to say the digital assets themselves are just code on a blockchain and are not the investment contract themselves. It’s a lot of promises undertakings that then are embodying the investment contract that was offered. And I thought that was a win for the industry and making sure the judge made the right decision. And I think here, again, looking at how the judge applies the law, because that’s what all everyone else in the industry will need to look to in the future precedent setting. Not the facts of this case, but the law that the judge is gonna set in this decision.
• Yeah, and I feel a lot of folks are anxiously awaiting to see what the decision here is because I know the SEC has said Bitcoin, not a security that’s kind of gotten a clarity. Ethereum still up in the air based on past individuals saying certain things but Chair Gary Gensler has not reiterated those statements. But there is thousands of other coins out there and some great projects that are want to know that we have to leave the United States. If Ripple wins, are we gonna be able to then maybe use that blueprint to fight our case if the SEC were to come after it?
• Yeah, and that’s what I’m saying. And I think that the legal precedent and the way that the judge focuses decision is gonna be important. And also it could be that the judge goes similar to the Telegram case where they’re focused just on the investment contract and primary offering and we’re still left with awaiting some of this pending SEC guidance or legislative actions on the secondary and how a digital asset that was previously offered under investment contract is treated for secondary transactions.
• Hmm. So from a crypto regulation standpoint, are there any bills like maybe Cynthia Lummis and Gillibrand bill or anything that you feel that has been put out in the past maybe Token Taxonomy Act, that you feel maybe gets it right and Congress could potentially move forward with?
• So I’m not as speculate on what gets it right ’cause I think each bill has, some are very tailored and specific and some are very broad to cover the many different regulatory issues and agencies that are impacted by this asset. But the Lummis Gillibrand Responsible and Financial Innovation Act is one that was specifically cited in the chambers brief as a potential roadmap for the court to look to. Because it does as at least on the securities side of the issue, distinguish an investment contract from the ancillary asset that is offered pursuing that investment contract. Especially in a world where the network may not be fully decentralized. It also encompasses some of the same messaging around the SEC from a disclosure perspective. It puts under the SEC’s purview disclosure requirements for the issuers or registrars of that asset. They have to comply with the SEC’s regime for disclosure. But that same ancillary asset may be traded on a spot commodities exchange regulated by the CFTC. So, I think that’s a good model or a model that the regulators could look to or the courts could look to make that distinction. But there’s a lot of different bills out there and certainly there are a lot of different ways to get it right. The important part is to put more out there for the market to be able to read and rely on and many are trying to do the right thing here and want a framework that works.
• Hmm. Yeah. And I’m hoping they get it right soon enough. And hopefully maybe 2023 is a year that this can be pushed through. And we are seeing more bipartisan support for crypto Democrats and Republicans, which is a great sign. Until then, I feel like the market’s in a bit of a limbo and we’ll have to see what happens next. I don’t know if you can talk about this, but are you hearing of other potential SEC enforcement actions or anything else? And once again, obviously, there’s legal president here that you may not be able to talk about any of the things, but I’m curious if you’re hearing about any of that.
• Yeah. The trend continues that we are seeing SEC enforcement increase representing a number of clients navigating that process which is some of them may have already been pending for quite some time, and now we’re just where their investigations from the SEC and now we’re seeing clients sort with requests for voluntary request for information or formal subpoenas. We’re seeing a trend where in the past some of those requests were against just token registrants issuers. Now we’re seeing also focus on intermediaries, which aligns with some of the messaging from SEC we’re seeing investment advisors being served some of these requests and in crypto exchanges being served in requests with respect to certain assets that they support. A lot of the requests follow the themes from the SEC’s public speeches that they believe certain assets need to consider whether or not the certain communis need to consider whether assets are securities and if so, may require registration. And I do have a subset of clients that are proactively engaging with SEC on how do we come in and register? What’s the right registration regime for certain assets that we believe are securities and are engaged proactively with the trading and market staff and chairs office and others on that registration process.
• Mm. Well, hopefully, we don’t get too many enforcement actions that go through until congress acts. But I got some wrap up questions here for you. First is rapid fire, favorite food.
• Favorite food? Give it some thought. I think any type of pasta dish with truffle mushrooms is my favorite. Love truffles everywhere.
• Favorite musician or band?
• Journey. Very big into any eighties band. But Journey is my top favorite.
• Favorite movie.
• Father of the Bride.
• Favorite book.
• Any travel book. I love traveling, especially to Europe and Italy. So travel books are my go to.
• What do you do for a pastime, hobby?
• Hobby, playing tennis, which in New Jersey can only play part of the year. But here in Texas tennis year round. So it’s definitely become addicted to it.
• Awesome. And finally, if you could create your own metaverse, what would the theme be?
• Theme would be opening up a bake shop, cupcake shop, especially in calorie free baked goods would be ideal. But, I’ve always wanted to open one in the real world, but why not start in the metaverse?
• Awesome. Lily, I appreciate you joining me and for the information you’ve shared. Thank you so much.
• Great, thank you.